When was the last time you ordered something from Amazon / Flipkart? And when did you last order food delivery from Swiggy or Zomato? The chances are, just yesterday or last week. Why? Because of the ongoing pandemic and lock-down maybe. But what will happen when the market is unlocked? Will you continue the same habits? Maybe, yes.
Actually, you have started enjoying the cost competitiveness and convenience offered by these tech giants. Going out is always associated with the pains of getting ready, driving, finding a parking place, queue, waiting etc. Now who wants these when we can get our shopping list home delivered.
Don’t you miss visiting your friendly neighborhood Kirana store or that swanky mall these days? Probably, you are still visiting kirana stores, it’s the mall whose wallet share is grabbed by Amazon and likes. So much for the talks of Modern trade and its domination in the market. The neighborhood store didn’t die a painful death. On the contrary, it survived, and flourished.
Same thing happened while eating out. Your visits to posh upmarket restaurants has gone down, but you order quite frequently from the neighborhood eatery. You are more comfortable when a restaurant delivery guy arrives with your food (You probably also know his name) rather than some unknown face from Zomato or Swiggy. Even if there is some issue in the order, it is generally sorted out with just one call (rather than plastering entire social media about it and tagging everyone powerful you know).
Your neighborhood eatery, which is not dependent on Zomato / Swiggy, is happy and profitable. He is least impacted by these market conditions.
That panipuriwala and Maggie wala are doing decent business and making a respectable living.
Not only in food, but the parallels can be drawn in other sectors as well.
The kirana store next door has been doing delivery since time immemorial. Much before amazon and flipkart arrived on the scene.
The vegetable cart vendor has a supply chain which is much more robust than Big Basket or Reliance. You will always find fresh vegetables in the cart, but not in the mall or ecommerce players. And it is home delivered. With free coriander, curry leaves and chili (of course). This guy is also happy and making a decent profit.
In the quest of creating mammoth corporations, did we just miss one fundamental aspect of Business?
Dinosaurs became extinct whereas cockroaches survived?
Small is Beautiful
Being large is not always an advantage. Sometimes, there are dis-economies of scale and the ability to change gears is restricted.
- Whenever you grow large, you accumulate fat in the middle (Your Middle Management).
- You are farther away from the customer (and with the truth)
- Market reality is buried deep in the polished presentations and ambiguous reports.
- Any change is either a 6 month program or a 1 year project or a 3 year strategic shift; it’s never a one hour turnaround.
So, being small can also be a good strategy at times.
Let’s consider the Food Delivery business. Or Aggregator’s business model, if you prefer jargon.
Zomato and Swiggy Saga
In India, this business is more akin to duopoly. We have two large players – Zomato and Swiggy. Together, they earned a revenue of Rs. 5,000 crores+ in FY 2019-20 (Swiggy’s total revenue stood at INR 2776 Cr, while Zomato earned INR 2486 Cr). They have mercilessly killed the smaller players all across the country by mega advertisement budgets and aggressive delivery partner payouts. So, practically they are ruling the Food Delivery Market today.
They charge hefty commission from restaurants (as high as 28-30%). Plus promotion fee, penalty and so on. Restaurant owners are crying, but they can’t see any other viable alternative. Most of them have issues in recruiting and retailing manpower, so they are relying on these giants. After parting with approx 30% of the revenue to these aggregators, the restaurant / cloud kitchen owners are finding their survival very difficult.
But still, Zomato and Swiggy are at a loss. They have never posted any profits in their entire existence.
What could possibly explain that?
Are they so dumb that even after having a yearly revenue of Rs. 2,500+ crores each, they can’t break even. You will understand the reason from their cost break-up. If as a company, you earn Rs. 70 on every order and end up spending Rs. 100; you will never be in profit. Amongst the cost, the highest component is delivery cost. This includes the cost of delivery partners (riders), their incentives, cost of running and maintaining the app etc. Discounts, Marketing and fixed cost is another Rs. 45. That’s where the money goes.Because they are big, and operate on Pan India basis, it will always be the situation for them. Some regions will continue to under-perform and manpower issues will continue resulting in high staff turnover and costs.
But that’s simple arithmetic and doesn’t take much brains to understand the reason. Then why are they not controlling this? Why are they allowing this to happen? Well, their actual game plan is different. It is driven more by valuations rather than actual profitability at this stage. We will discuss this some other time.
The Startup Idea
Now, how this graph would look if you are small, or are a startup? Obviously, you would not want to have such high delivery costs. At the same time, your revenue per order is also not as high. But still, you are profitable. Simple logic and common sense. Let’s understand step by step:
- Only variable cost in delivery is the fuel cost and cost of rider’s time. Rest everything is fixed cost.
- For a 3km delivery route, total fuel cost is Rs. 9 (Rs. 1.5 per km; just an average)
- You don’t need to charge 25 or 30% of order value from the restaurant. In fact, the order value for you is meaningless. Even if you charge Rs. 20-30 per order depending on the city; you are earning a respectable gross margin.
- Your staff has a monthly salary (or profit share; if they are partners). Don’t have more than 5-6 riders. A small website and app, uniforms, branding elements, other miscellaneous items are all one time cost. Common sense says that the business is profitable.
- You need to be smart in planning your launch, onboarding partners, value added services etc to improve your acceptability and profitability. If you are making life easy for end customers, the business will be rewarding for you.
You don’t need multi-storied offices, a plethora of data centers and IT set-up, multi-crore CEO paychecks, nothing of that proportion. A small startup, operating in just one city (or a part of the city), limited riders, limited restaurants, limited clientele. But real experts of the neighborhood. Personalized service, recommendations, service.
No brainer Business Model, isn’t it.
Most successful business models are no-brainers. They are very simple to understand.
Just plan the steps carefully. The success lies in execution.
India can have 1000s of such small delivery startups. Just like we have lakhs of neighborhood kirana stores. All giving a tough fight to the deep pocket MNCs.
Restaurants don’t need to feel caged in the clutches of Swiggy / Zomato type companies. They need to find a solution. And a viable one.
This seems like a viable solution.
What do you think? Let me know.
Randheer
P.S. At Food Kindle, we are introducing a workshop to explain the critical success factors and blueprint for this business. Check it out here.